The word ‘Hybrid’ reflects upon the literal meaning ‘combination of two things’, and now referring to the next part of the title, smart contracts, dates back to ‘Third Blockchain Generation’, commonly known as Blockchain 3.0. This generation of blockchain usually wraps itself around the evolution of Ethereum and Smart Contracts.
After a glimpse into the literal meaning of Hybrid smart contracts, let’s take a plunge into the technical meaning of the term. Akin to the blockchain contracts, hybrid smart contracts serve the purpose but unlike the traditional smart contracts, it carries an additional cherry. Hybrid Smart Contract is powered by two decentralized networks- one is Blockchain, and the other is Decentralized Oracle Network (DON). The combination of two networks refers to the contract as a Hybrid Smart Contract.
Introduction to Oracle Network
Oracles are computer programs that connect data from the outside world (off-chain) with the blockchain world (on-chain). Talking about smart contracts, it uses Oracle as a gateway to connect with the data sources prevailing from the outside world.
With Oracle Network, computations that would be unattainable on-chain can be performed off-chain. Smart hybrid contracts use a decentralized oracle network (DON), which allows them to use off-chain information while retaining blockchain properties like immutability and tamper-proofing.
This insightful study will provide a detailed and comprehensive assessment of hybrid smart contracts, thus revealing a lot of information about DON. Here’s what it covers:
Why is there a need for hybrid smart contracts?
What is the composition of hybrid smart contracts?
In a hybrid smart contract, what are the distinct roles of on-chain and off-chain computations?
Which new capabilities are offered by hybrid smart contracts?
Need for Smart Contracts
Over the past several years, smart contracts on Blockchain have been used by the world to overcome the imperfections of centralized contracts.
Asymmetrical central contract systems always benefit one party by unfairly influencing the arbitration process. There is always one party who has more money, time, and a clear understanding of how contracts are enforced. Such centralized contract systems rely on the brand value of counterparties as a method of determining the trustworthiness of the counterpart.
In the absence of transparency and immutability, collaboration through centralized contract systems occurs through brand-based trust. Blockchain smart contracts have replaced the conventional centralized system. Everything about smart contracts is blockchain-based whether it is execution, hosting, custody mechanisms, or enforcement infrastructure. Thus, the smart contracts purely run on a decentralized network and no one can tamper the can’t undermine. Yet, there is a glitch in smart contracts.
The Glitch in Smart Contracts!
Undoubtedly, smart contracts are acknowledged as the most reliable, robust, trustworthy, and transparent contracts. However, there are just a few glitches in Smart Contracts as well that could limit down their functionality.
Let’s venture into it! Blockchain typically provides data that defines the terms of smart contracts. An on-chain programming language is the only programming language that smart contracts can understand.
Smart Contract’s Inability to Read off-chain Programing Language
A smart contract is unable to connect to real-world data sources. Oracles were mainly introduced to the crypto ecosystem to solve this dilemma. Oracle is a bridge that connects the off-chain data to on-chain data.
For a clear understanding, the oracle is also termed as the middleware (software) that translates the off-chain (real-world) to on-chain data (blockchain world), eventually making the real-world data systems and sources functional for the blockchain smart contracts.
But here the question arises: how smart contracts are secured and immutable when oracle is a centralized entity. Centralized means the data and security parameters can be compromised. Thus there is a concerning question whether sourcing of the data from centralized oracle is faulty or not? The answer is certainly a yes, the centralized system of the oracle makes the immutability and trustworthiness of a smart contract doubtful and questionable.
This is the point when the need for hybrid smart contracts was realized, chainlink stepped in to make hybrid smart contracts.
Chainlink Hybrid Smart Contract
A Hybrid Smart Contract is considered as an ideal solution to address the issues of the previously mentioned single centralized oracle centralized system. But the hybrid smart contract maintains the essence of decentralization. Chainlink Hybrid Smart Contracts connect the Blockchain network of the smart contract not to a centralized oracle but to a Decentralized Oracle Network (DON).
Both DON and Blockchain offer unique features that are not available to others. A hybrid Smart contract can provide capabilities that both Blockchain and Oracle could not achieve alone by synchronizing them.
The Composition of Hybrid Smart Contracts
A smart hybrid smart contract entails the two main components;
Smart Contract- The code runs exclusively on the blockchain.
Decentralized Oracle Network- A distributed network of oracle nodes that provide information from the off-chain data sources to the on-chain blockchain smart contracts.
The process goes like the following way
How the Chainlink Hybrid Smart Contracts Work?
In hybrid smart contract application, whenever the blockchain asks for off-chain in a hybrid smart contract application, it sends out a request for information to the Chainlink protocol.
In order to create a Chain Link SLA contract on the Blockchain, Chainlink creates a corresponding smart contract called the Chainlink Service Level Agreement (SLA). The SLA contract is further subdivided into three subcontracts:
Chainlink Reputation Contract:
This subcontract is responsible mainly for checking the authenticity and performance history of an Oracle node. It manages to declutter the unnecessary clutter of disputed or non-reliable Oracle nodes.
A Chainlink Order Matching Contract:
This sub-contract sends the Blockchain's data request to the verified oracle nodes and receives their bids back. Afterward, the network approves the necessary nodes and types to satisfy the data request.
The Chainlink Aggregating Contract:
The Chainlink aggregating contract pulls out the data request to the DON’s oracle nodes, but this request corresponds to the on-chain programming language.
Here, the Chainlink nodes use a software called “Chainlink Core” to convert the on-chain language to an off-chain programming language, making it convenient in readability to real-world data sources.
Once the request has been translated, it is routed/directed out to an external API that collects data from the real-world source. Chainlink Core translates the data back to on-chain language when the data has been retrieved from the API. Later it is sent back to the Aggregating contract.
On-Chain and Off-Chain Computation in Hybrid Smart Contracts
The ledger contains authoritative records of asset ownership. Additionally, it interacts with private keys.
The system is responsible for transferring value between users irreversibly and for final settlements.
By providing dispute resolution and guardrails, it ensures the proper operation of DON's off-chain services.
Off-Chain: Decentralized Oracle Network
Smart contracts run on blockchains retrieve data from external APIs, validate, secure, and deliver it to smart contracts.
It executes different types of calculations to run blockchain smart contracts and Layer-2 solutions.
The Bottom Line
By combining blockchain-based smart contracts with off-chain data sources, hybrid smart contracts can access novel use-cases that Blockchain does not support inherently. It also extends cryptographic security to real-world data systems, enhancing their usefulness. Centralized authority is one of the weaknesses of today's contract systems, as discussed earlier. Hybrid Smart contracts depend on the trust of the brand.
A hybrid smart contract entails a logic-based trust, it bootstraps collaboration over decentralized networks that are more secure, scalable, and reliable.